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Moody's Market Signals Sovereign Risk Report Summary

Core Content

This report from Moody's Capital Markets Research, Inc. (CMR) provides an analysis of market-based credit risk signals for various regions, including Europe and the Asia-Pacific, during the week ending August 8, 2014. The report discusses how economic conditions and geopolitical events have impacted sovereign risk measures, such as Sovereign EDF™ (Expected Default Frequency), CDS implied ratings, and bond implied ratings.

Main Points

• European Sovereign Risk:

  • Concerns over the Ukraine conflict and Italy's economic recession led to an increase in European sovereign credit risk.
  • Ukraine saw the most significant rise in Sovereign EDF, increasing by 42%.
  • Greece and Italy also experienced substantial increases, at 22% and 21%, respectively.
  • Despite the overall increase, the level of expected default risk in Europe remains relatively low.
  • Estonia was an exception, showing stable Sovereign EDF levels at 0.02% since the start of the year.
  • The average bond-implied rating for European countries is A2, which is higher than the average CDS-implied rating of Baa1 and higher than Moody's credit ratings of A3.

• Economic Indicators:

  • Italy's economy contracted by 0.2% in Q2 2014, marking its second consecutive decline.
  • Italy's public debt stood at 133% of GDP at the end of 2013, making it difficult to reduce debt.
  • The International Monetary Fund (IMF) cut Italy's growth forecast for 2014 by 0.3 percentage points to 0.3%.

• Geopolitical Impact:

  • Geopolitical tensions, particularly from the Ukraine conflict, influenced market sentiment and increased perceived risk.
  • Russia's retaliatory measures against US and EU sanctions led to uncertainty and economic risks.
  • The Russian MICEX index fell by 4% since July 30, and the S&P 500 and Euro Stoxx indices also declined by around 3%.

• Bond Yields:

  • European safe-harbor government bonds reached record highs, with Germany's 10-year bond yield hitting a new all-time low of 1.05%.
  • Southern peripheral European countries saw increases in long-term nominal yields: Spain and Portugal rose from 2.5% to 2.6% and 3.7% to 3.8%, respectively.
  • Greece's 10-year bond yield was notably higher at 6.5%, compared to its peers.

• Asia-Pacific Sovereign Risk:

  • Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Sri Lanka, and Vietnam all showed varying levels of Sovereign EDF and implied ratings.
  • Most countries in the region maintained stable or slightly improved sovereign risk indicators, with some showing a slight decline in EDF and an increase in CDS implied ratings.
  • Bond implied ratings for several countries remained consistent with their senior ratings, indicating market confidence in their creditworthiness.

Key Information

• Sovereign EDF™: A forward-looking probability of default derived from CDS spreads, adjusted for loss-given default and market risk.
• CDS Implied-Rating: Reflects the market's assessment of credit risk based on CDS spreads.
• Bond Implied-Rating: Reflects the market's assessment of credit risk based on bond yields.
• Senior Rating: Moody's official credit rating for the country.
• Moody's Analytics: Provides market-based credit risk analysis, separate from Moody's Investors Service (MIS), which offers fundamental research.

Summary Table (Selected Countries)

Conclusion

The report highlights that while there were concerns over the Ukraine conflict and Italy's economic performance, the overall sovereign risk in Europe remains relatively low. In the Asia-Pacific, most countries showed stable or slightly improved credit risk measures, with a few exceptions indicating some level of market concern. The analysis underscores the importance of monitoring both economic and geopolitical factors in assessing sovereign credit risk.